In an interview with ET Now, Uday Kotak, MD, Kotak Mahindra Bank, shares his views on the pre-Budget market correction and risk-on and risk-off trade. Excerpts:

What is your take on the market correction?

Economic reality is certainly tougher than what the markets have been saying so far, especially in the last few months, and a lot of our market valuations are dependent on risk-on or risk-off global trade which is the issue. Therefore, if there is a risk-off trade overseas, we see the Indian markets correct.

So, that correction needs to happen as well?

That is correct.

You spoke about the risk-on and the risk-off trade as well and every now and then these jitters to the risk-on trade that we have seen play out over a while now. How worried are you about the fact that the risk-on trade could take a serious knocking and that could in turn affect the sentiment?

We will go through most of 2013 reasonably okay. There may be a little volatility from time to time, but overall lose monetary policy globally is likely for most of 2013 and therefore even if there are fears of future interest rates going up 2013, we will be able to have a global comfortable and benign liquidity situation.

So you would not read too much into the minutes of Fed meeting that seems to have caused a lot of nervousness?

I do not think the Fed did anything in 2012. This is my personal view and that is the sense one has got in totality. Therefore, we may be coming closer to the end of a loosening cycle, but we are not at the end.

So, there is no cause for panic?

No cause for panic. It will be easy money situation globally, but we have to get our act together in the next few months.

In the conference of yours that just concluded a few days ago, what is the sense that you got speaking to a lot of foreign investors who must have come in as well? They had been once pumping in a lot of money into India. Is that confidence still there or do you see them being a little tentative going forward?

The investors are doing a lot more detailing and are focusing bottom up. They are not necessarily very excited at this stage. Top down select companies, attractive valuations and high quality governance, that is the kind of companies investors feel comfortable being with. Â But do you think the kind of liquidity that we are seeing coming from foreign investors is likely to continue or do you think that is at risk as well?

The liquidity is really linked to the global liquidity situation which I feel would be reasonably benign in 2013 and that is the positive. Therefore portfolio flows give us some comfort to put our corrective action in place.

You spoke about things that we need to do as well to fix our economy and markets. The fact remains that through the course of much of 2012 the retail investors have been completely absent. In fact, they have been absent for years now and domestic institutions are not quite buying. What can the government do to get them back to the market, especially the retail investors?

You got to do two things. First of all, the hurdle rate for retail investors in terms of their alternative investment opportunities is very high. Therefore, if you take any individual today with some of the tax breaks, he or she can get his/her hurdle rate post tax 8% to 9% which is pre-tax 12% to 13% in rupee terms and that is a pretty high hurdle rate on fixed income to go out and buy equities, so, lower interest rates.

Number two, we need to build confidence that investment cycle is happening, growth will be encouraged, entrepreneurship and corporate sector will be supported by the government and that kind of confidence will lead to a positive investment cycle, but that is something which will take time and in the interim therefore we need to give, what I would call, a little bit of steroids to get investors back, which will hopefully get some tax breaks in this budget to nudge people into equities.